What is a lien?
Sometimes, a person’s word isn’t quite enough. When creditors feel that there is some risk a debt will not be repaid, they can establish what is known as a lien. A lien is a legal right against assets that can be used as collateral to satisfy an unpaid debt. In other words, a creditor could file a lien on something a debtor owns, their car for example. If the debtor does not uphold their obligations under the debt they owe, then the creditor could seize their car as payment.1
What is a lienor (lienholder)?
Just like leases have lessors, liens have lienors, or lienholders. The lienholder is the creditor who the debtor owes money to. In some more specific cases, the lienholder may have given the debtor a loan to buy something, a car or a house, and their lien applies to that purchase until the loan is paid off. If the loan is not paid, the lienholder is able to seize the debtor’s purchase and sell it to pay off the rest of the debt. Not every lien is the result of a direct, loan and purchase kind of transaction, however the lienholder always has legal right to some asset of the debtor’s in the event of non-payment.
What is a lien on a car or vehicle?
Any time someone finances a car rather than purchasing it outright, the lienholder has the right to file for a “mechanic’s lien”. This most common form of lien gives the lienholder the right to seize the purchased vehicle if the loan isn’t repaid and sell it to pay the difference. Mechanic’s liens must be filed at the DMV after going through the courts, as the lienholder will be named on the vehicle’s registration.2
Lienholder vs lessor; What’s the difference?
A lienholder and lessor share many similarities in how they operate with the debtor/lessee. In both cases a payment system has been agreed upon which, if violated, may give the lienholder or lessor the right to remove material assets from the debtor or lessee. What’s different is the overarching premise under which the payments are being made. It is common practice for a lienholder with a mechanic’s lien to keep the title for the car until the debtor has made full repayment. It may feel very much like they are leasing their vehicle while repayment is being made, but the debtor will eventually get the title in their name, obtaining full legal ownership of the car once repayment is completed.3
In the case of the lessee, ownership is not the endgame. Those who decide to lease rather than buy must continue to make regular payments until they no longer want/need the property they’re leasing, at which point they can stop making payments and forfeit the property (though specifics can vary depending on the type of lease).4
Buying or selling a car with a lien
Buying
Buying a car with a lien should always be done carefully. If a car has a lien, even if the purchaser was not aware of that lien before making the purchase, that purchaser is still responsible for paying off the lien once the purchase is made. Besides that, the car will most likely pass hands with the lienholder on the car title, since lienholders typically hold titles until the loan is repaid. But maybe you’re buying your first car and this just has to be the one, or maybe no better options exist. Either way, if you’re set on purchasing a car with a lien, try to negotiate with the seller to pay off the loan before completing the sale, or otherwise deduct the outstanding value of the loan from the purchase price.5
Selling
There are several ways to sell a car with a lien, all involving different ways the loan can be repaid so that the car title can be transferred to its new owner. The seller can go through a dealership, which will then either pay off the loan balance with the proceeds of the sale or add the payoff amount to the loan being used to buy the car. The sale can also be performed in person at the lender’s office, where either the buyer or seller can pay off the loan by transferring funds to the lender. Alternatively, the buyer can simply wire the funds to pay off the loan directly to the lender.6
Lienholder car insurance requirements?
As long as a lienholder’s name is on a car’s title, they legally own the car. That means they’re also going to have to be on that car’s insurance policy. Lienholders may require that their debtor purchases full coverage rather than just the coverage required by the state. This likely entails adding comprehensive and collision coverage to the policy.7
How do you add a lienholder to your insurance?
Debtors can add lienholders to their insurance policy by contacting their insurance company and providing information such as the lienholder’s mailing address, fax and phone numbers and account numbers. Any changes to the policy that the lienholder has required should be included, too. Debtors should have their insurance company notify their lienholder once they have been successfully added to the policy.8
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1https://www.investopedia.com/terms/l/lien.asp, Accessed October 2021.
2https://www.bankrate.com/insurance/car/what-is-a-lienholder/, Accessed October 2021.
3https://www.coverage.com/insurance/auto/what-is-a-lienholder/ Accessed October 2021.
4https://www.investopedia.com/terms/l/leasehold.asp, Accessed October 2021.
5https://www.bankrate.com/insurance/car/what-is-a-lienholder/, Accessed October 2021.
6https://www.investopedia.com/articles/budgeting-savings/082816/how-sell-car-lien.asp, Accessed October 2021.
7https://www.bankrate.com/insurance/car/what-is-a-lienholder/, Accessed October 2021.
8https://www.progressive.com/answers/what-is-a-lienholder/, Accessed October 2021.
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